Office tenants seek out top-tier spaces, showing downtown market isn’t quite dead

The downtown Chicago office market remained stuck in the doldrums during the first half of 2024, with a historically high vacancy rate and sinking office employment. But the news isn’t all bad. The best skyscrapers, either recently built or renovated, are thriving as companies entice employees back downtown by renting top-tier offices.

“The old adage that success breeds success is true,” said Robert Sevim, president, Chicago Region for Savills, a commercial real estate firm.

Employers leased more than 2 million square feet downtown in the second quarter, well below pre-pandemic averages, and a record-breaking 29.3% of office space is available, according to a second quarter Savills report. But landlords pushed up rents in Class A buildings, especially the new office towers along the Chicago River in the West Loop and in Fulton Market, by nearly 3% in the past year.

“It underscores that there is activity in the market, which is far from being dead,” Sevim said.

Many companies slashed their office spaces. The quarter’s largest lease was signed by Grubhub, which took 90,000 square feet at the renovated Merchandise Mart, a 45% reduction from what it occupies in the Burnham Center at 111 W. Washington St. in the Central Loop. The Federal Deposit Insurance Corp. signed the third largest deal, expanding its office at 300 S. Riverside Plaza.

The Central Loop is filled with older office buildings, and one-third of its office space is available, the most of any downtown neighborhood, Savills found. The availability rate for the Far West Loop and Fulton Market is less than 25%.

With so much space on the market, a lot of workers assume their employers will be able to ink great deals for upscale offices, but Sevim said it may not be easy. Even well-occupied buildings can carry large amounts of debt, and with so many office users looking to shed space, landlords may not have enough income to cover their mortgages and add new amenities.

“Tenants theoretically have a lot of choices, but practically speaking, less so,” Sevim said.

Companies need to find buildings with solid financial outlooks, preferably with little or no debt and strong cash flow. Sevim pointed to 1 S. Wacker Drive, a 40-story West Loop office tower owned by New York-based 601W Cos., as a good example. The company was recently able to extend its loan for the property, and just launched a nearly $30 million renovation of several floors.

“Every company should understand that who it’s dealing with on the other side of the table is more important than ever,” he said.